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Falling Platinum Price Hits South African Mines

Platinum is grouped together with gold and silver, as well as its cousin palladium, under the umbrella of “precious metals.” However true, this somewhat obscures the fact that platinum is an increasingly useful industrial metal.

As it transitions from being primarily used as an exotic precious metal investment into a key component in the automobile industry, it makes sense that prices for platinum would begin to come down. It’s unlikely that anyone expected a continual decline of the magnitude that’s occurred, though: In just over five years, the platinum price has halved from above $1,800/oz, trading at around $950/oz at the time of this writing.

Over the last 12 months, platinum has even been as low as $899 per ounce. Since hitting its all-time high in 2008 amid the financial meltdown, it has lost about 60%.

Unrest at South Africa’s Platinum Mines

The falling price of platinum has put a squeeze on platinum miners. This is particularly true in South Africa, which produces more than two-thirds of the world’s annually mined platinum supply.

Now, with less revenue available to be returned to labor, the lower platinum prices are directly causing social unrest among mineworkers in South Africa. Mind you, the platinum industry is no stranger to labor unrest and prolonged strikes, particularly since 2014. Strikes and protests that disrupt normal mining operations have occasionally dragged on for months. In several African countries that similarly rely on the mining industry for jobs and development, mining companies have partnered with local villages to provide for community reinvestment and other social outreach programs that return corporate dividends to the poor, rural communities where such mines are often located.

However, Bloomberg News describes how dwindling profits are causing many of these programs to be rolled back:

“As platinum prices fell and industry costs rose over the past decade, dividends paid to local community trusts dried up and many pledges to improve living conditions went unfulfilled. Frustration is now bubbling over in mining communities, which typically include a mix of mineworkers, job-seeking migrants and rural populations who have been living there since before mining started.”

It does seem that the companies involved are responding to locals’ concerns. Within the South African government, the Chamber of Mines represents the big producers. The chamber’s recently-elected president commented on the unrest, acknowledging that protesters simply want to “participate in the economy.” The unemployment rate in the country is an unhealthy 28%.

The key to all of this, according to the Chamber of Mines as well industry leader Anglo American Platinum, is growth. There can be little reform and improvement for workers if the industry doesn’t expand. It’s estimated that more than half of the production coming from platinum mines as a whole is actually losing money right now.

Other Externalities

There other effects from falling platinum prices that may be of interest to investors. First and foremost, cheaper platinum is actually a boon for the auto industry, which uses the metal in catalytic converters.

However, palladium is also a component of these emission-reduction devices. Interestingly enough, palladium prices are coming remarkably close to being in parity with platinum. There is less than a $100 spread between the two metals, a ratio that is out of whack historically. Will this be a long-term change in the market for platinum and palladium? If so, it could significantly alter the investing strategies of hedge funds and money managers around the world.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.